A Tale of 2 Policies : How Your Quake Insurance Can Save You--or Sink You : Valencia homeowner Reena Newhall paid more than twice what her neighbor did for protection that wasn’t half as effective. That chasm in coverage says much about the earthquake insurance business.

Two neighbors, two insurance policies, two vastly different stories.

Jan Tucker and Reena Newhall live next door to each other in a new Valencia subdivision that was badly jolted by the Jan. 17 Northridge earthquake.

Their stucco-sheathed homes, built by the same contractor in similar styles, suffered similar destruction: deep cracks and some structural damage inside, broken tiles and brickwork outdoors, and cabinets full of china, glassware and other personal items smashed to the floor.

But Tucker’s earthquake insurance will cover everything beyond a single $22,100 deductible, whereas Newhall must meet separate deductibles of $68,550 for the home itself and $34,275 for its contents.

Moreover, Newhall’s policy costs $994 a year and Tucker’s, $387.

“We have so much insurance that we don’t have any,” Newhall exclaimed during a recent interview in her battered kitchen.

That Reena Newhall could pay more than twice as much for coverage that in this case isn’t even half as effective says much about the earthquake insurance business and shows why consumers need to educate themselves.

But perhaps the first question to ask is whether earthquake insurance is necessary in the first place.

Californians spent $524 million on quake insurance in 1992, which was nearly three-quarters of the total for the whole country, according to the Insurance Information Institute.

Still, fewer than one in four Californians statewide bother to buy the coverage. It is more popular in Southern California, where up to 40% of homeowners have it.

The most common reasons people give for refusing the coverage are high prices and high deductibles. Rates range from $1.25 to $10 per $1,000 worth of coverage, although about $2 per $1,000 is typical.

The standard deductible is 10% of coverage limits, but policies are available with deductibles as high as 25%. State Farm, California’s largest insurer, is one of the few companies that still sells earthquake insurance with a 5% deductible. Many carriers phased out 5% deductibles after the 1989 Loma Prieta quake ravaged the Bay Area.

High deductibles are one reason why insurers shoulder a relatively small share of the burden in earthquakes. However, experts still recommend buying earthquake insurance. Although it can be frustrating to pay for an insurance policy that provides no protection against a slight or moderate loss, experts believe consumers ought to change their thinking about earthquake insurance. Its real value comes in its protection against a severe or total loss.

“We used to tell people not to buy quake insurance, but frankly, we’re less comfortable with that position now,” said Gail Hillebrand, a lawyer with Consumers Union in San Francisco. “It is a bad buy relative to your chances of ever collecting, but it’s the only thing out there.”

In the Loma Prieta earthquake, insurers paid out claims of $960 million, while total destruction reached some $7 billion.

The ratio of insurance payouts to total damage might be similar in the Northridge quake. The official industry estimate of insured damage is $2.5 billion, although some insurance experts expect that number to climb. The total cost--including damage to uninsured public infrastructure such as freeways--is now estimated from $13 billion to $20 billion.

Agoura resident Kathy Nenneker, whose home sustained about $15,000 worth of damage--less than her deductible--said she and her husband have been debating whether to keep their quake insurance.

“If the house falls down, the 10% deductible suddenly isn’t so bad,” she said.

Emily Chan Clark’s house didn’t fall down, but it did shift from its foundation and sprout cracks in every direction.

The Northridge resident said the damage could be anywhere from $100,000 to $250,000, including contents.

“I don’t have a plate or glass or bowl to my name,” she said.

From her perspective, the $18,000 deductible looks insignificant.

“I can tell you one thing,” she said. “The premium I pay on the earthquake insurance is sure worth it.”

The consensus, then, seems to be that earthquake insurance is worthwhile, but consumer advocates emphasize that you need to know what you’re shopping for. The earthquake insurance market has undergone some dramatic changes in recent years.

Oddly enough, the disaster that has had the most profound influence on the market was not an earthquake at all, but the Oakland and Berkeley firestorm of October, 1991.

After the conflagration, which killed 25 and destroyed more than 2,500 homes, many fire victims discovered that they were woefully underinsured because their policy limits either hadn’t kept pace with rising construction costs or hadn’t fully reflected the value of their homes in the first place.

For those with “guaranteed replacement value” coverage, it was the insurer’s responsibility to restore the home regardless of cost.

However, many people had “actual cash value” coverage, meaning that the payout was strictly capped at the policy limits. If you had a $100,000 policy, $100,000 was the most you could collect, even if it would cost $300,000 to rebuild your house.

A huge public outcry ensued, with homeowners, consumer advocates and politicians accusing insurance companies of failing to adequately inform and protect their customers.

Insurers bowed to the pressure, paying some $300 million beyond policy limits on Oakland fire claims--in effect acting as though people were entitled to guaranteed replacement coverage whether their policies said so or not.

Determined not to get caught the same way twice, the industry began aggressively reviewing its homeowners’ coverage to make sure that policy limits reflected the actual costs of rebuilding.

These so-called insure-to-value programs came under harsh criticism last week by Insurance Commissioner John Garamendi, who said there are such wide variations in how insurers calculate construction costs and apply annual inflation factors that the result can be “as unfair as the scoring for Olympic figure skating.”

How did the insure-to-value programs affect earthquake coverage?

Two ways, in the case of Reena Newhall, the Valencia homeowner who discovered that her coverage didn’t measure up to her next-door neighbor’s.

First, her insurer, TIG Insurance Co. (formerly Transamerica Insurance Co.), sent her and other policyholders a form in mid-1992, asking for detailed information about home size and design features. Based on Newhall’s responses, TIG boosted her policy limits by 20%, from $380,000 to $457,000. That caused the limits on her personal property coverage (one-half the dwelling limits, in TIG’s standard policy) to take a similar leap, from $190,000 to $228,500.

Second, with Oakland fresh in mind, TIG hired a consultant to analyze the company’s exposure to various kinds of disasters. The consultant reported that if an 8.3-magnitude earthquake--the strength of the San Francisco quake of 1906--struck the San Andreas fault, TIG would face potential losses of $110 million, according to TIG Vice President Dave Rowlands.

That number was unacceptably high, Rowlands said, so TIG--with the approval of Garamendi’s office--reduced its exposure by boosting the deductibles on its earthquake coverage. For people like Reena Newhall with policy limits of over $100,000, the deductible jumped from 10% to 15%.

Thus, from one year to the next, her deductibles nearly doubled--from $38,000 to $68,550 on the dwelling and from $19,000 to $34,275 on the contents.

Meanwhile, next door, Jan Tucker had insurance with the Auto Club of Southern California. Because it doesn’t operate in the Bay Area and was unscathed by the Oakland fire, the Auto Club did not undertake any sweeping changes in its homeowner policies.

Tucker’s home is one story and 3,150 square feet, Newhall’s two stories and 3,800 square feet. The styles and interior construction features are nearly identical.

However, the two insurers’ rebuilding cost estimates are radically different. TIG’s estimate is $120 per square foot and Auto Club’s only $70 per square foot, which accounts for much of the difference in policy limits between the two homes.

It was these kinds of variations that Garamendi criticized in last week’s broadside against insure-to-value programs.

Newhall, whose husband, Anthony, is a descendant of the founder of the Newhall Land & Farming Co., developer of the master-planned community of Valencia and a major landowner in the Santa Clarita Valley, admits that she didn’t always pay attention to her insurance bills as they arrived.

“I just wrote the check,” she said. “Pretty stupid, huh?”

But Newhall also blames her insurance agent and TIG for not making more of an effort to bring the policy changes to her attention and explain how they came about.

Garamendi announced that he is developing new regulations to require insurers to inform policyholders in their annual renewal notices about exactly how inflation and construction cost factors contributed to any change in their premiums.

Consumer advocates favor greater disclosure as well, but they add that homeowners shouldn’t be passive in evaluating a product as complex as earthquake insurance.

“You need to take control,” said Mary Griffin, insurance counsel for the Consumers Union in Washington. “Don’t just let other people tell you what’s happening. You have to really read the policy.”

And after reading the policy, shop around. There’s enough variety in homeowner’s insurance products that comparison shopping can pay off.

Newhall is unhappy with just about every aspect of her policy, but there are cases where separate deductibles like hers are an advantage over a single, lump-sum deductible like Tucker’s. If the only damage you suffered was to your home’s contents, for example, you’d be better off with the separate deductible because it’s lower.